Madmen and the Godless Algorithm

FB-vs-Google

This article from The New Yorker.

Good overview history of the advertising model that has dominated our commercialism for decades. It’s now gone on digital steroids. The disruption of ad technology has interesting implications.

How the Math Men Overthrew the Mad Men

By Ken Auletta

Once, Mad Men ruled advertising. They’ve now been eclipsed by Math Men—the engineers and data scientists whose province is machines, algorithms, pureed data, and artificial intelligence. Yet Math Men are beleaguered, as Mark Zuckerberg demonstrated when he humbled himself before Congress, in April. Math Men’s adoration of data—coupled with their truculence and an arrogant conviction that their “science” is nearly flawless—has aroused government anger, much as Microsoft did two decades ago.

The power of Math Men is awesome. Google and Facebook each has a market value exceeding the combined value of the six largest advertising and marketing holding companies. Together, they claim six out of every ten dollars spent on digital advertising, and nine out of ten new digital ad dollars. They have become more dominant in what is estimated to be an up to two-trillion-dollar annual global advertising and marketing business. Facebook alone generates more ad dollars than all of America’s newspapers, and Google has twice the ad revenues of Facebook.

In the advertising world, Big Data is the Holy Grail, because it enables marketers to target messages to individuals rather than general groups, creating what’s called addressable advertising. And only the digital giants possess state-of-the-art Big Data. “The game is no longer about sending you a mail order catalogue or even about targeting online advertising,” Shoshana Zuboff, a professor of business administration at the Harvard Business School, wrote on faz.net, in 2016. “The game is selling access to the real-time flow of your daily life—your reality—in order to directly influence and modify your behavior for profit.” Success at this “game” flows to those with the “ability to predict the future—specifically the future of behavior,” Zuboff writes. She dubs this “surveillance capitalism.” [I question whether this will really work as anticipated once everybody is hip to the game.]

However, to thrash just Facebook and Google is to miss the larger truth: everyone in advertising strives to eliminate risk by perfecting targeting data.[This is the essence of what we’re doing here – reducing the risk of uncertainty.] Protecting privacy is not foremost among the concerns of marketers; protecting and expanding their business is. The business model adopted by ad agencies and their clients parallels Facebook and Google’s. Each aims to massage data to better identify potential customers. Each aims to influence consumer behavior. To appreciate how alike their aims are, sit in an agency or client marketing meeting and you will hear wails about Facebook and Google’s “walled garden,” their unwillingness to share data on their users. When Facebook or Google counter that they must protect “the privacy” of their users, advertisers cry foul: You’re using the data to target ads we paid for—why won’t you share it, so that we can use it in other ad campaigns? [But who really owns your data? Even if you choose to give it away?]

This preoccupation with Big Data is also revealed by the trend in the advertising-agency business to have the media agency, not the creative Mad Men team, occupy the prime seat in pitches to clients, because it’s the media agency that harvests the data to help advertising clients better aim at potential consumers. Agencies compete to proclaim their own Big Data horde. W.P.P.’s GroupM, the largest media agency, has quietly assembled what it calls its “secret sauce,” a collection of forty thousand personally identifiable attributes it plans to retain on two hundred million adult Americans. Unlike Facebook or Google, GroupM can’t track most of what we do online. To parade their sensitivity to privacy, agencies reassuringly boast that they don’t know the names of people in their data bank. But they do have your I.P. address, which yields abundant information, including where you live. For marketers, the advantage of being able to track online behavior, the former senior GroupM executive Brian Lesser said—a bit hyperbolically, one hopes—is that “we know what you want even before you know you want it.”[That sounds like adman hubris rather than reality.]

Worried that Brian Lesser’s dream will become a nightmare, ProPublica has ferociously chewed on the Big Data privacy menace like a dog with a bone: in its series “Breaking the Black Box,” it wrote, “Facebook has a particularly comprehensive set of dossiers on its more than two billion members. Every time a Facebook member likes a post, tags a photo, updates their favorite movies in their profile, posts a comment about a politician, or changes their relationship status, Facebook logs it . . . When they use Instagram or WhatsApp on their phone, which are both owned by Facebook, they contribute more data to Facebook’s dossier.” Facebook offers advertisers more than thirteen hundred categories for ad targeting, according to ProPublica.

Google, for its part, has merged all the data it collects from its search, YouTube, and other services, and has introduced an About Me page, which includes your date of birth, phone number, where you work, mailing address, education, where you’ve travelled, your nickname, photo, and e-mail address. Amazon knows even more about you. Since it is the world’s largest store and sees what you’ve actually purchased, its data are unrivalled. Amazon reaches beyond what interests you (revealed by a Google search) or what your friends are saying (on Facebook) to what you actually purchase. With Amazon’s Alexa, it has an agent in your home that not only knows what you bought but when you wake up, what you watch, read, listen to, ask for, and eat. And Amazon is aggressively building up its meager ad sales, which gives it an incentive to exploit its data.

Data excite advertisers. Prowling his London office in jeans, Keith Weed, who oversees marketing and communications for Unilever, one of the world’s largest advertisers, described how mobile phones have elevated data as a marketing tool. “When I started in marketing, we were using secondhand data which was three months old,” he said. “Now with the good old mobile, I have individualized data on people. You don’t need to know their names . . . You know their telephone number. You know where they live, because it’s the same location as their PC.” Weed knows what times of the day you usually browse, watch videos, answer e-mail, travel to the office—and what travel routes you take. “From your mobile, I know whether you stay in four-star or two-star hotels, whether you go to train stations or airports. I use these insights along with what you’re browsing on your PC. I know whether you’re interested in horses or holidays in the Caribbean.” By using programmatic computers to buy ads targeting these individuals, he says, Unilever can “create a hundred thousand permutations of the same ad,” as they recently did with a thirty-second TV ad for Axe toiletries aimed at young men in Brazil. The more Keith Weed knows about a consumer, the better he can aim to target a sale.

Engineers and data scientists vacuum data. They see data as virtuous, yielding clues to the mysteries of human behavior, suggesting efficiencies (including eliminating costly middlemen, like agency Mad Men), offering answers that they believe will better serve consumers, because the marketing message is individualized. The more cool things offered, the more clicks, the more page views, the more user engagement. Data yield facts and advance a quest to be more scientific—free of guesses. As Eric Schmidt, then the executive chairman of Google’s parent company, Alphabet, said at the company’s 2017 shareholder meeting, “We start from the principles of science at Google and Alphabet.”

They believe there is nobility in their quest. By offering individualized marketing messages, they are trading something of value in exchange for a consumer’s attention. They also start from the principle, as the TV networks did, that advertising allows their product to be “free.” But, of course, as their audience swells, so does their data. Sandy Parakilas, who was Facebook’s operations manager on its platform team from 2011 to 2012, put it this way in a scathing Op-Ed for the Times, last November: “The more data it has on offer, the more value it creates for advertisers. That means it has no incentive to police the collection or use of that data—except when negative press or regulators are involved.” For the engineers, the privacy issue—like “fake news” and even fraud—was relegated to the nosebleed bleachers. [This fact should be obvious to all of us.]

With a chorus of marketers and citizens and governments now roaring their concern, the limitations of Math Men loom large. Suddenly, governments in the U.S. are almost as alive to privacy dangers as those in Western Europe, confronting Facebook by asking how the political-data company Cambridge Analytica, employed by Donald Trump’s Presidential campaign, was able to snatch personal data from eighty-seven million individual Facebook profiles. Was Facebook blind—or deliberately mute? Why, they are really asking, should we believe in the infallibility of your machines and your willingness to protect our privacy?

Ad agencies and advertisers have long been uneasy not just with the “walled gardens” of Facebook and Google but with their unwillingness to allow an independent company to monitor their results, as Nielsen does for TV and comScore does online. This mistrust escalated in 2016, when it emerged that Facebook and Google charged advertisers for ads that tricked other machines to believe an ad message was seen by humans when it was not. Advertiser confidence in Facebook was further jolted later in 2016, when it was revealed that the Math Men at Facebook overestimated the average time viewers spent watching video by up to eighty per cent. And in 2017, Math Men took another beating when news broke that Google’s YouTube and Facebook’s machines were inserting friendly ads on unfriendly platforms, including racist sites and porn sites. These were ads targeted by keywords, like “Confederacy” or “race”; placing an ad on a history site might locate it on a Nazi-history site.

The credibility of these digital giants was further subverted when Russian trolls proved how easy it was to disseminate “fake news” on social networks. When told that Facebook’s mechanized defenses had failed to screen out disinformation planted on the social network to sabotage Hillary Clinton’s Presidential campaign, Mark Zuckerberg publicly dismissed the assertion as “pretty crazy,” a position he later conceded was wrong.

By the spring of 2018, Facebook had lost control of its narrative. Their original declared mission—to “connect people” and “build a global community”—had been replaced by an implicit new narrative: we connect advertisers to people.[Indeed, connecting people on a global basis for human interaction really doesn’t make a lot of sense. A global gossip network? Unless, of course, you’re trying to monetize it.] It took Facebook and Google about five years before they figured out how to generate revenue, and today roughly ninety-five percent of Facebook’s dollars and almost ninety percent of Google’s comes from advertising. They enjoy abundant riches because they tantalize advertisers with the promise that they can corral potential customers. This is how Facebook lured developers and app makers by offering them a permissive Graph A.P.I., granting them access to the daily habits and the interchange with friends of its users. This Graph A.P.I. is how Cambridge Analytica got its paws on the data of eighty-seven million Americans.

The humiliating furor this news provoked has not subverted the faith among Math Men that their “science” will prevail. They believe advertising will be further transformed by new scientific advances like artificial intelligence that will allow machines to customize ads, marginalizing human creativity. With algorithms creating profiles of individuals, Airbnb’s then chief marketing officer, Jonathan Mildenhall, told me, “brands can engineer without the need for human creativity.” Machines will craft ads, just as machines will drive cars. But the ad community is increasingly mistrustful of the machines, and of Facebook and Google.[As they should be – the value has been over-hyped.] During a presentation at Advertising Week in New York this past September, Keith Weed offered a report to Facebook and Google. He gave them a mere “C” for policing ad fraud, and a harsher “F” for cross-platform transparency, insisting, “We’ve got to see over the walled gardens.”

That mistrust has gone viral. A powerful case for more government regulation of the digital giants was made by The Economist, a classically conservative publication that also endorsed the government’s antitrust prosecution of Microsoft, in 1999. The magazine editorialized, in May, 2017, that governments must better police the five digital giants—Facebook, Google, Amazon, Apple, and Microsoft—because data were “the oil of the digital era”: “Old ways of thinking about competition, devised in the era of oil, look outdated in what has come to be called the ‘data economy.’ ” Inevitably, an abundance of data alters the nature of competition, allowing companies to benefit from network effects, with users multiplying and companies amassing wealth to swallow potential competitors.

The politics of Silicon Valley is left of center, but its disdain for government regulation has been right of center. This is changing. A Who’s Who of Silicon notables—Tim Berners-Lee, Tim Cook, Ev Williams, Sean Parker, and Tony Fadell, among others—have harshly criticized the social harm imposed by the digital giants. Marc Benioff, the C.E.O. of Salesforce.com—echoing similar sentiments expressed by Berners-Lee—has said, “The government is going to have to be involved. You do it exactly the same way you regulated the cigarette industry.”

Cries for regulating the digital giants are almost as loud today as they were to break up Microsoft in the late nineties. Congress insisted that Facebook’s Zuckerberg, not his minions, testify. The Federal Trade Commission is investigating Facebook’s manipulation of user data. Thirty-seven state attorneys general have joined a demand to learn how Facebook safeguards privacy. The European Union has imposed huge fines on Google and wants to inspect Google’s crown jewels—its search algorithms—claiming that Google’s search results are skewed to favor their own sites. The E.U.’s twenty-eight countries this May imposed a General Data Protection Regulation to protect the privacy of users, requiring that citizens must choose to opt in before companies can horde their data.

Here’s where advertisers and the digital giants lock arms: they speak with one voice in opposing opt-in legislation, which would deny access to data without the permission of users. If consumers wish to deny advertisers access to their cookies—their data—they agree: the consumer must voluntarily opt out, meaning they must endure a cumbersome and confusing series of online steps. Amid the furor about Facebook and Google, remember these twinned and rarely acknowledged truisms: more data probably equals less privacy, while more privacy equals less advertising revenue. Thus, those who rely on advertising have business reasons to remain tone-deaf to privacy concerns.

Those reliant on advertising know: the disruption that earlier slammed the music, newspaper, magazine, taxi, and retail industries now upends advertising. Agencies are being challenged by a host of competitive frenemies: by consulting and public-relations companies that have jumped into their business; by platform customers like Google and Facebook but also the Times, NBC, and Buzzfeed, that now double as ad agencies and talk directly to their clients; by clients that increasingly perform advertising functions in-house.

But the foremost frenemy is the public, which poses an existential threat not just to agencies but to Facebook and the ad revenues on which most media rely. Citizens protest annoying, interruptive advertising, particularly on their mobile phones—a device as personal as a purse or wallet. An estimated twenty per cent of Americans, and one-third of Western Europeans, employ ad-blocker software. More than half of those who record programs on their DVRs choose to skip the ads. Netflix and Amazon, among others, have accustomed viewers to watch what they want when they want, without commercial interruption.

Understandably, those dependent on ad dollars quake. The advertising and marketing world scrambles for new ways to reach consumers. Big Data, they believe, promises ways they might better communicate with annoyed consumers—maybe unlock ways that ads can be embraced as a useful individual service rather than as an interruption. If Big Data’s use is circumscribed to protect privacy, the advertising business will suffer. In this core conviction, at least, Mad Men and Math Men are alike.

This piece is partially adapted from Auletta’s forthcoming book, “Frenemies: The Epic Disruption of the Ad Business (and Everything Else).”

 

I would guess that the ad business will be disrupted further as we find new ways to connect consumers with what they want. This will reduce the power of the Math Men at centralized network servers.

I also suspect search will become a regulated public utility. A free society cannot tolerate one or two private corporations controlling all the information data that flows through its networks.

 

Vampire Squids?

 

likenolike

I would say this essay by Franklin Foer is a bit alarmist, though his book is worth reading and taking to heart. We are gradually becoming aware of the value of our personal data and I expect consumers will soon figure out how to demand a fair share of that value, else they will withdraw.

Technology is most often disrupted by newer technology that better serves the needs of users. For Web 2.0 business models, our free data is their lifeblood and soon we may be able to cut them off. Many hope that’s where Web 3.0 is going.

tuka is a technology model that seeks to do exactly that for creative content providers, their audiences, and promoter/fans.

How Silicon Valley is erasing your individuality

Washington Post, September 8, 2017

 

Franklin Foer is author of “World Without Mind: The Existential Threat of Big Tech,” from which this essay is adapted.

Until recently, it was easy to define our most widely known corporations. Any third-grader could describe their essence. Exxon sells gas; McDonald’s makes hamburgers; Walmart is a place to buy stuff. This is no longer so. Today’s ascendant monopolies aspire to encompass all of existence. Google derives from googol, a number (1 followed by 100 zeros) that mathematicians use as shorthand for unimaginably large quantities. Larry Page and Sergey Brin founded Google with the mission of organizing all knowledge, but that proved too narrow. They now aim to build driverless cars, manufacture phones and conquer death. Amazon, which once called itself “the everything store,” now produces television shows, owns Whole Foods and powers the cloud. The architect of this firm, Jeff Bezos, even owns this newspaper.

Along with Facebook, Microsoft and Apple, these companies are in a race to become our “personal assistant.” They want to wake us in the morning, have their artificial intelligence software guide us through our days and never quite leave our sides. They aspire to become the repository for precious and private items, our calendars and contacts, our photos and documents. They intend for us to turn unthinkingly to them for information and entertainment while they catalogue our intentions and aversions. Google Glass and the Apple Watch prefigure the day when these companies implant their artificial intelligence in our bodies. Brin has mused, “Perhaps in the future, we can attach a little version of Google that you just plug into your brain.”

More than any previous coterie of corporations, the tech monopolies aspire to mold humanity into their desired image of it. They think they have the opportunity to complete the long merger between man and machine — to redirect the trajectory of human evolution. How do I know this? In annual addresses and town hall meetings, the founding fathers of these companies often make big, bold pronouncements about human nature — a view that they intend for the rest of us to adhere to. Page thinks the human body amounts to a basic piece of code: “Your program algorithms aren’t that complicated,” he says. And if humans function like computers, why not hasten the day we become fully cyborg?

To take another grand theory, Facebook chief Mark Zuckerberg has exclaimed his desire to liberate humanity from phoniness, to end the dishonesty of secrets. “The days of you having a different image for your work friends or co-workers and for the other people you know are probably coming to an end pretty quickly,” he has said. “Having two identities for yourself is an example of a lack of integrity.” Of course, that’s both an expression of idealism and an elaborate justification for Facebook’s business model.

There’s an oft-used shorthand for the technologist’s view of the world. It is assumed that libertarianism dominates Silicon Valley, and that isn’t wholly wrong. High-profile devotees of Ayn Rand can be found there. But if you listen hard to the titans of tech, it’s clear that their worldview is something much closer to the opposite of a libertarian’s veneration of the heroic, solitary individual. The big tech companies think we’re fundamentally social beings, born to collective existence. They invest their faith in the network, the wisdom of crowds, collaboration. They harbor a deep desire for the atomistic world to be made whole. (“Facebook stands for bringing us closer together and building a global community,” Zuckerberg wrote in one of his many manifestos.) By stitching the world together, they can cure its ills.

Rhetorically, the tech companies gesture toward individuality — to the empowerment of the “user” — but their worldview rolls over it. Even the ubiquitous invocation of users is telling: a passive, bureaucratic description of us. The big tech companies (the Europeans have lumped them together as GAFA: Google, Apple, Facebook, Amazon) are shredding the principles that protect individuality. Their devices and sites have collapsed privacy; they disrespect the value of authorship, with their hostility toward intellectual property. In the realm of economics, they justify monopoly by suggesting that competition merely distracts from the important problems like erasing language barriers and building artificial brains. Companies should “transcend the daily brute struggle for survival,” as Facebook investor Peter Thiel has put it.

When it comes to the most central tenet of individualism — free will — the tech companies have a different way. They hope to automate the choices, both large and small, we make as we float through the day. It’s their algorithms that suggest the news we read, the goods we buy, the paths we travel, the friends we invite into our circles. [Blogger Note: As computers can’t write music like humans, algorithms cannot really define tastes. Our sensibilities are excited by serendipity, innovation, and surprise.]

It’s hard not to marvel at these companies and their inventions, which often make life infinitely easier. But we’ve spent too long marveling. The time has arrived to consider the consequences of these monopolies, to reassert our role in determining the human path. Once we cross certain thresholds — once we remake institutions such as media and publishing, once we abandon privacy — there’s no turning back, no restoring our lost individuality.

***

Over the generations, we’ve been through revolutions like this before. Many years ago, we delighted in the wonders of TV dinners and the other newfangled foods that suddenly filled our kitchens: slices of cheese encased in plastic, oozing pizzas that emerged from a crust of ice, bags of crunchy tater tots. In the history of man, these seemed like breakthrough innovations. Time-consuming tasks — shopping for ingredients, tediously preparing a recipe and tackling a trail of pots and pans — were suddenly and miraculously consigned to history.

The revolution in cuisine wasn’t just enthralling. It was transformational. New products embedded themselves deeply in everyday life, so much so that it took decades for us to understand the price we paid for their convenience, efficiency and abundance. Processed foods were feats of engineering, all right — but they were engineered to make us fat. Their delectable taste required massive quantities of sodium and sizable stockpiles of sugar, which happened to reset our palates and made it harder to satehunger. It took vast quantities of meat and corn to fabricate these dishes, and a spike in demand remade American agriculture at a terrible environmental cost. A whole new system of industrial farming emerged, with penny-conscious conglomerates cramming chickens into feces-covered pens and stuffing them full of antibiotics. By the time we came to understand the consequences of our revised patterns of consumption, the damage had been done to our waistlines, longevity, souls and planet.

Something like the midcentury food revolution is now reordering the production and consumption of knowledge. Our intellectual habits are being scrambled by the dominant firms. Giant tech companies have become the most powerful gatekeepers the world has ever known. Google helps us sort the Internet, by providing a sense of hierarchy to information; Facebook uses its algorithms and its intricate understanding of our social circles to filter the news we encounter; Amazon bestrides book publishing with its overwhelming hold on that market.

Such dominance endows these companies with the ability to remake the markets they control. As with the food giants, the big tech companies have given rise to a new science that aims to construct products that pander to their consumers. Unlike the market research and television ratings of the past, the tech companies have a bottomless collection of data, acquired as they track our travels across the Web, storing every shard about our habits in the hope that they may prove useful. They have compiled an intimate portrait of the psyche of each user — a portrait that they hope to exploit to seduce us into a compulsive spree of binge clicking and watching. And it works: On average, each Facebook user spends one-sixteenth of their day on the site.

In the realm of knowledge, monopoly and conformism are inseparable perils. The danger is that these firms will inadvertently use their dominance to squash diversity of opinion and taste. Concentration is followed by homogenization. As news media outlets have come to depend heavily on Facebook and Google for traffic — and therefore revenue — they have rushed to produce articles that will flourish on those platforms. This leads to a duplication of the news like never before, with scores of sites across the Internet piling onto the same daily outrage. It’s why a picture of a mysteriously colored dress generated endless articles, why seemingly every site recaps “Game of Thrones.” Each contribution to the genre adds little, except clicks. Old media had a pack mentality, too, but the Internet promised something much different. And the prevalence of so much data makes the temptation to pander even greater.

This is true of politics. Our era is defined by polarization, warring ideological gangs that yield no ground. Division, however, isn’t the root cause of our unworkable system. There are many causes, but a primary problem is conformism. Facebook has nurtured two hive minds, each residing in an informational ecosystem that yields head-nodding agreement and penalizes dissenting views. This is the phenomenon that the entrepreneur and author Eli Pariser famously termed the “Filter Bubble” — how Facebook mines our data to keep giving us the news and information we crave, creating a feedback loop that pushes us deeper and deeper into our own amen corners.

As the 2016 presidential election so graphically illustrated, a hive mind is an intellectually incapacitated one, with diminishing ability to tell fact from fiction, with an unshakable bias toward party line. The Russians understood this, which is why they invested so successfully in spreading dubious agitprop via Facebook. And it’s why a raft of companies sprouted — Occupy Democrats, the Angry Patriot, Being Liberal — to get rich off the Filter Bubble and to exploit our susceptibility to the lowest-quality news, if you can call it that.

Facebook represents a dangerous deviation in media history. Once upon a time, elites proudly viewed themselves as gatekeepers. They could be sycophantic to power and snobbish, but they also felt duty-bound to elevate the standards of society and readers. Executives of Silicon Valley regard gatekeeping as the stodgy enemy of innovation — they see themselves as more neutral, scientific and responsive to the market than the elites they replaced — a perspective that obscures their own power and responsibilities. So instead of shaping public opinion, they exploit the public’s worst tendencies, its tribalism and paranoia.

***

During this century, we largely have treated Silicon Valley as a force beyond our control. A broad consensus held that lead-footed government could never keep pace with the dynamism of technology. By the time government acted against a tech monopoly, a kid in a garage would have already concocted some innovation to upend the market. Or, as Google’s Eric Schmidt, put it, “Competition is one click away.” A nostrum that suggested that the very structure of the Internet defied our historic concern for monopoly.

As individuals, we have similarly accepted the omnipresence of the big tech companies as a fait accompli. We’ve enjoyed their free products and next-day delivery with only a nagging sense that we may be surrendering something important. Such blitheness can no longer be sustained. Privacy won’t survive the present trajectory of technology — and with the sense of being perpetually watched, humans will behave more cautiously, less subversively. Our ideas about the competitive marketplace are at risk. With a decreasing prospect of toppling the giants, entrepreneurs won’t bother to risk starting new firms, a primary source of jobs and innovation. And the proliferation of falsehoods and conspiracies through social media, the dissipation of our common basis for fact, is creating conditions ripe for authoritarianism. Over time, the long merger of man and machine has worked out pretty well for man. But we’re drifting into a new era, when that merger threatens the individual. We’re drifting toward monopoly, conformism, their machines. Perhaps it’s time we steer our course.

Why musicians are so angry…

…at the world’s most popular music streaming service

Slide09
Washington Post
 July 14
With the money from CDs and digital downloads disappearing, the music industry has pinned its hope for the future on online song streaming, which now accounts for the majority of the $7.7 billion U.S. music market.

But the biggest player in this future isn’t one of the names most associated with streaming — Spotify, Amazon, Pandora or Apple. It’s YouTube, the site best known for viral videos, which accounts for 25 percent of all music streamed worldwide, far more than any other site.

Now, YouTube is locked in an increasingly bitter battle with music labels over how much it pays to stream their songs — and at stake is not just the finances of the music industry but also the way that millions of people around the world have grown accustomed to listening to music: free of cost.

Music labels accuse YouTube of using a legal loophole to pay less for songs than traditional music-streaming sites, calling YouTube the biggest threat since song piracy crippled the industry in the early 2000s. The industry has pressed its case to regulators around the world in hopes of forcing a change.

“I do think YouTube is starting to panic a little bit,” said Mitch Glazier, president of the Recording Industry Association of America.

But YouTube is not backing down, stressing the benefits to musicians of promotion on one of the Web’s most popular sites — which allows ordinary users to integrate music into their uploads. YouTube also warns against attacks that could reduce competition among streaming services.

“The industry should be really, really careful because they could close their eyes and wake up with their revenue really concentrated in two, three sources,” said Lyor Cohen, YouTube’s global head of music, referring to Spotify, Apple Music and Amazon Prime Music. (Amazon founder Jeffrey P. Bezos owns The Washington Post.)

The music industry counters they are backed into a corner when negotiating with YouTube — a unit of Google-parent Alphabet — which is mostly shielded by federal law from being responsible for what users post on the site.

“It isn’t a level playing field,” said one executive at a major music label who spoke on the condition of anonymity because he wasn’t authorized to talk, “because ultimately you’re negotiating with a party who is going to have your content no matter what.”

Now, the battle is heating up as the European Union is expected to release new rules later this year for how services such as YouTube handle music, potentially upending some of the copyright protections that undergird the Internet.

Online streaming works like a digital jukebox, with fractions of a penny paid each time a song is played. The money comes from ads and subscriptions.

The E.U. has formally recognized that there is a “value gap” between song royalties and what user-upload services such as YouTube earn from selling ads while playing music. YouTube is by far the largest user-upload site.

How such a law would address the gap is still being decided, but the E.U. has indicated it plans to focus on ensuring copyright holders are “properly remunerated.”

Even the value gap’s existence is disputed.

A recent economic study commissioned by YouTube found no value gap — in fact, the report said YouTube promotes the music industry, and if YouTube stopped playing music, 85 percent of users would flock to services that offered lower or no royalties.

A different study by an independent consulting group pegged the YouTube value gap at more than $650 million in the United States alone.

“YouTube is viewed as a giant obstacle in the path to success for the streaming marketplace,” Glazier said.

The dispute boils down to what YouTube pays for songs.

Musicians from Arcade Fire to Garth Brooks to Pharrell Williams say they earn significantly less when their songs are played on YouTube than on a site such as Spotify — even though many listeners use these services in the same way. Both YouTube and Spotify allow users to search for music and find song recommendations. On YouTube, users can find music alongside cat videos and toy reviews in what is generally a free-for-all of content, while people go to Spotify and the like for a more refined experience. Some audiophiles argue the sound quality on music streaming sites is superior.

YouTube pays an estimated $1 per 1,000 plays on average, while Spotify and Apple music pay a rate closer to $7.

Irving Azoff, the legendary manager for acts such as the Eagles and Christina Aguilera, said he has one artist — whom he declined to name — who gets 33 percent of her online streams from YouTube but only 10 percent of her streaming revenue.

Smaller acts see it, too. Zoe Keating, an instrumental cello player, showed The Washington Post a statement from YouTube showing that she earned $261 from 1.42 million views on YouTube. In comparison, she earned $940 from 230,000 streams on Spotify.

“YouTube revenue is so negligible that I stopped paying attention to it,” Keating said.

YouTube admits that it pays less for songs.

But the reason for this disparity is where the two sides split.

The music industry claims YouTube has avoided paying a fair-market rate by hiding behind broad legal protections. In the United States, that’s the “safe harbor” provision, which essentially says YouTube is not to blame if someone uploads a copy-protected song —unless the copyright holder complains.

This, the music industry argues, leads to a costly game of “Whac-A-Mole”: hunting for illicit song uploads and filing notices with YouTube.

“You can’t prevent something from going up on YouTube. All you can do is ask them to take it down,” said Stephen Carlisle, who runs the copyright office at Nova Southeastern University. “At some point, it’s not worth it to do this.”

YouTube says it has the solution: Its Content ID system automatically checks for violations by comparing songs detected in new uploads against a database of claimed songs, capturing 99.5 percent of complaints. The company says it averages fewer than 1,500 traditional copyright claims from the music industry a week.

YouTube also pointed out that it has licensing deals with music labels large and small.

Earlier this year, Warner Music Group — one of the “big three” music labels — signed a new licensing deal with YouTube, and a memo from Warner chief executive Steve Cooper leaked out, saying the deal was signed “under very difficult circumstances.”

“There’s no getting around the fact that, even if YouTube doesn’t have licenses, our music will still be available but not monetized at all,” the memo continued.

Warner confirmed the memo’s authenticity, but, like the other major labels, declined to comment for this article.

Cooper’s complaints surprised Cohen, who worked at Warner until leaving for YouTube last year.

“I never heard that from his mouth during the entire negotiation,” Cohen said.

Cohen’s move to YouTube created waves in the industry. After all, Cohen was famous for taking one of the hardest stands against YouTube when, in 2008, he pulled Warner’s entire song catalogue from the video service to protest low song royalties. It was the nuclear option.

And it failed. After nine months and spending $2 million trying to keep its music off YouTube, Warner capitulated.

Cohen said he was sympathetic to his former colleague’s complaints. But YouTube pays $1 billion in song royalties worldwide each year. Cohen said his company has been hindered by its global reach — ad rates are lower outside the United States — and its slower rollout of a subscription option, YouTube Red. Song royalties are higher with monthly subscriptions than ads.

“What I’m trying to do with YouTube is be a cheerleader to build a subscription business that the industry can be proud of,” Cohen said.

Nabila Hisham, 22, is a music fan on YouTube. Recently, the college student in Kuala Lumpur, Malaysia, has been playing one song repeatedly: “Despacito,” a chart-topping Latin pop remix featuring Justin Bieber. The YouTube video — which has a total of 412 million plays — is a photo of Bieber’s tattooed neck. The video is beside the point. For, Hisham, it’s about the music.

“I’m glad that YouTube exists,” she said.

Correction: A previous version of this story stated YouTube’s ContentID system automatically handles 98 percent of copyright management for songs. The system handles 99.5 percent.

Blockchain’s New World

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What is the BlockChain?

Why it’s disruptive: Blockchain promises to make firms’ back-end operations more efficient and cheaper. Eventually, it could replace companies altogether.

Interesting article on the broad business/economic implications of blockchain technology with a wealth of relevant links to additional resources:

Executive’s guide to implementing blockchain technology

The technology behind bitcoin is one of the internet’s most promising new developments. Here’s how businesses can use it to streamline operations and create new opportunities.

 

Blockchains are one of the most important technologies to emerge in recent years, with many experts believing they will change our world in the next two decades as much as the internet has over the last two.

Although it is early in its development, firms pursuing blockchain technology include IBM, Microsoft, Walmart, JPMorgan Chase, Nasdaq, Foxconn, Visa, and shipping giant Maersk. Venture capitalists have so far poured $1.5 billion into the space, with storied firms such as Andreessen Horowitz, Kleiner Perkins Caufield and Byers, and Khosla Ventures making bets on startups.

A blockchain is a golden record of the truth that creates trust among multiple parties.

The applications for blockchain technology seem endless. While the first obvious ones are financial — international payments, remittances, complex financial products — it can also solve problems and create new opportunities in healthcare, defense, supply chain management, luxury goods, government, and other industries. In more advanced stages, the technology could give rise to what Gartner calls “the programmable economy,” powered by entirely new business models that eliminate all kinds of middlemen, machine networks in which devices engage in economic activity, and “smart assets” in which some form of property such as shares in a company can be traded according to programmable or artificial intelligence-based rules rather than the control of a centralized entity.

EXECUTIVE SUMMARY

What is blockchain: A blockchain is a single version of the truth made possible by an immutable and secure time-stamped ledger, copies of which are held by multiple parties.

Why it matters: It shifts trust in business from an institution or entity to software and could someday spell the demise of many traditional companies. It also promises to make trade-able many assets that are illiquid today, enable our devices and gadgets to become consumers, and bring trust to many areas of business, eliminating fraud and counterfeiting.

How it works: Cryptography secures the data and new transactions are linked to previous ones, making it near-impossible to change older records without having to change subsequent ones. And because multiple “nodes” (computers) run the network, one would need to gain control of more than half of them in order to make changes.

Why it’s disruptive: At the least it promises to make firms’ back-end operations more efficient and cheaper, but down the line, it could replace companies altogether.

Business opportunities: New services and products will pop up in areas such as creating and trading assets, tracking provenance, managing supply chain, managing identity, and in providing ancillary services to the software itself.

Main vendors: More than a dozen platform vendors have sprung up, and several dozen consulting and implementation providers assist in adopting blockchain projects.

Career options: The main blockchain specialists include developers and business and technical architects. But roles are also needed in risk management, security, cryptography, business process management, product strategy, and analytics.

WHAT IS BLOCKCHAIN

A blockchain is a golden record of the truth that creates trust among multiple parties. Specifically, it’s a secure, tamper-proof ledger with time-stamped transactions, distributed amongst a number of entities.

This means a blockchain — a piece of technology — can replace an intermediary in situations where a trusted third party is required. So, for instance, while we now need a bank (or several) in order to make a payment to a foreign country, a piece of software — the program running bitcoin — can now send money to someone across the world for us. And the latter is much cheaper and faster — and, in the case of bitcoin, transparent so you can see when the money arrives, whereas with a bank wire, you have to find out from the recipient. (Blockchains can be made private as well, to protect data.) Overall, blockchain technology promises greater security and lower costs than traditional databases.

“The problem in the market is that blockchain is being used as a collective noun for the bitcoin blockchain and everything else in between, and that’s not exactly true,” says David Furlonger, Gartner vice president and fellow. Blockchain has become the catch-all phrase for a larger group of technologies called “distributed ledger technology” or DLT. Technically speaking, it is possible to have a distributed ledger that is not constructed as a blockchain (as described below), however, when people refer to blockchain technology, they are often speaking about DLT.

And if you want to get really technical, “DLT falls short because it assumes information gets distributed when in many cases it doesn’t,” says Javier Paz, senior analyst at financial services research firm Aite Group. But “blockchain,” “distributed ledger,” or “DLT” should suffice for all but the most technical discussions.

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WHY IT MATTERS

“The key differentiator between a database and blockchain is that a database is managed and controlled by someone,” says Eric Piscini, principal of financial services technology at Deloitte. “A blockchain doesn’t need to be managed by someone, so you don’t have to trust someone to run the platform. It’s run by everyone at the same time. That’s a shift in business models.”

Eventually, blockchains could give rise to a number of peer-to-peer networks not run by any centralized parties that enable the creation and transfer of money or other assets. For instance, the technology could be used to create an Airbnb-like network without the company Airbnb. When combined with the Internet of Things (IoT), it could create an Uber-like program without Uber. Such peer-to-peer networks are often referred to as distributed autonomous organizations (DAOs), and someday, they could transform our whole conception of companies.

Gartner projects that blockchain will result in $176 billion in added business value by 2025, and $3.1 trillion by 2030.

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HOW IT WORKS

Not every blockchain works the same way. For example, they can differ in their consensus mechanisms, which are the rules by which the technology will update the ledger. But broadly, a blockchain is a ledger on which new transactions are recorded in blocks, with each block identified by a cryptographic hash of that data. The same hash will always result from that data, but it is impossible to re-create the data from the hash. Similarly, if even the smallest detail of that transaction data is changed, it will create a wildly different hash, and since the hash of each block is included as a data point in the next block, subsequent blocks would also end up with different hashes. This is what makes the ledger tamper-proof. Finally, security also comes from the fact that multiple computers called nodes store the blockchain, and so to change the ledger, one would need to gain control of at least 50 percent of the computing power in order to change the record — a difficult feat especially for a public blockchain such as bitcoin’s.

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WHY IT’S DISRUPTIVE

A common saying is that blockchain technology will do what the internet did to media — disrupt — but to sectors such as financial services, law, and other industries offering trust as a service.

“The industry has lived and breathed off the back of intermediation,” Furlonger says. Noting that banks typically control financial activity and governments usually control the economic assets we use, he adds, “If you think about the way authentication and identification is done, the way you onboard customers, the way you share records, all of this is done through siloed, decades-old channels and processes. And here you have a technology that basically says you no longer need a middleman, you have one golden copy of a record that no one can change … anyone can join any time because it’s open source … it’s kind of free, anyone can create any asset and distribute it to anyone else on the planet. You’re basically saying, we’re going to change the way the economic models that have grown up for the last several centuries operate. As a result, we’re going to change the way society operates as well.”

He believes the outcome will be what Gartner calls “the programmable economy,” which it defines as a global market powered by algorithmic businesses and DAOs running on blockchain-based networks whose assets engage in economic activity by rules coded in software or artificial intelligence. The two most commonly used public networks so far are bitcoin and Ethereum, a public blockchain like bitcoin’s that is focused on smart contracts, which are software programs that execute transactions when certain conditions are met.

But that’s at least a decade off. To start, the technology will make the back-end operations of many companies more efficient because, now, firms that work with each other and even different departments within one organization often maintain their own ledgers, duplicating work. “At least we will see it impacting the back and middle office, eradicating the problems and cost associated with sustaining multiple versions of the truth,” Paz says.

A recent report by Bain and Company estimated that the savings from implementation of blockchain technology would amount to $15 to $35 billion annually. As services at certain companies become more efficient and cheaper, marketshare among incumbents is likely to change. And because the technology is open source, “You can build that platform for a fraction of what it would cost you with traditional technologies,” Piscini says. That gives both startups as well as the software itself an opening. For instance, people could use the bitcoin network, which is not run by any one company, to make payments cheaply, quickly, and efficiently. “If you just enable transactions for others, you’re in big trouble,” he says, “because the blockchain can replace you as an entity without the need for a legal entity to run it.”

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BUSINESS OPPORTUNITIES

Though some executives might fear software replacing their role or their company’s, even email hasn’t killed snail mail. Though the technology does promise to change existing marketshare, Piscini says companies can avoid becoming obsolete by seizing upon new opportunities. “If companies provide incremental services, if they provide you the ability to dispute transactions, to do some analytics on top of that platform — incremental value that you don’t have today — that’s how they’re going to survive.” In fact, blockchain technology will enable companies to offer services that previously were impossible without it. Gartner predicts that by 2022, at least one new business based on blockchain technology will be worth $10 billion.

Blockchain technology makes possible new offerings in industries as diverse as financial services, healthcare, supply chain, oil and gas, retail, music, advertising, publishing, media, energy, government, and many others. In finance alone, it can be used for making international payments, trading stocks, bonds, and commodities, and providing an audit trail for regulators. It can create new forms of assets and make it possible to trade existing illiquid ones, such as mobile minutes, energy credits and frequent flyer miles. It can be used to track provenance, stamping out fraud and counterfeiting in areas such as luxury goods, fine art, pharmaceuticals, food, and government documents. It makes it possible for musicians, writers, and other artists to embed royalty payments into their MP3s, ebooks, and other creations to pay themselves every time their work is bought or resold. It can be used by publishers to run publications funded not by ads but by micropayments issued by readers’ browsers. It can enable people to manage their identity and the privacy of their data instead of having to rely on centralized entities such as Google, Facebook, or Twitter. It can show an individual voter that their vote was counted correctly and the entire electorate that no votes were fraudulent or counted more than once. And those are just some examples.

Gartner projects that devices or things using blockchains to transact will comprise 30 percent of the global customer base by 2030. One of the more popular futuristic scenarios is that we may someday tell our self-driving car that we’re in a rush and to send a micropayment to any car that is willing to be passed on the highway. The money will be transmitted via a combination of blockchain and IoT technologies.

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VENDORS

A host of platform vendors to enterprise have already cropped up. Although the space has more than a dozen players, the most active groups (two are not companies), in alphabetical order, are:

  1. Chain, which, together with Nasdaq, created the first private blockchain in production (though on a small scale) — Nasdaq Linq, which is used in managing shares in private companies. It also has partnerships with Visa, Citi, and Capital One.
  2. Ethereum, a P2P network that’s public like bitcoin but focused on smart contracts, not payments, and that has an enterprise initiative, the Enterprise Ethereum Alliance (EEA).
  3. Hyperledger, the open-source effort run by the Linux Foundation and closely affiliated with IBM which counts companies as diverse as Airbus, American Express, Daimler, and Intel as members.
  4. R3, a consortium of financial institutions whose distributed ledger offering, Corda, is not structured as a blockchain, meaning that transaction data is not published to the ledger of every participant in the network. Instead transactions are published only on the ledgers of the relevant parties.

Others include Axoni, Digital Asset Holdings, Monax, Ripple, SETL, Symbiont, and T0 (T-zero, as in settlement in zero days).

Businesses helping firms implement blockchain solutions include Accenture, CapGemini, Chainsmiths, Deloitte, Ernst and Young, IBM Global Services, Infosys, KMPG, PwC, Polaris, Tata Consultancy Services, Wipro, and others. IBM and Microsoft are leaders in cloud blockchain services.

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